The global economic recovery has hit some resistance
Spatterings of weak data should have policymakers worried
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Shoppers in Tokyo: Japanese consumer spending and wage growth has been weaker than expected © AFP
Not everything in the world has been going badly, at least until now. There may have been rising tension over geopolitics and trade, but the global economy has continued to achieve broad-based growth in the past couple of years. More recently, however, there have been a few spatterings of rain out of an apparently clear sky.
A series of downbeat business surveys in the eurozone, plus an unexpected third successive monthly fall in industrial production in February, have cast some doubt on the robustness of the European recovery. Employment in the US has been weaker than expected, as has Japanese consumer spending and wage growth, meaning Japan is likely to remain below its 2 per cent inflation target for some time to come.
Activity in the Chinese economy, meanwhile, also appears to be soft. Overall, the global economy is performing below expectations: Citigroup’s economic surprise indicator, which measures actual data relative to predictions, has turned sharply down. More policy-induced risk, especially from such an erratic source as US President Donald Trump, is precisely what the world does not need.
Even more worrying is the fact that many of these events predated the threat of significant international economic disruption from a trade war started by the US, which has had some impact on financial markets but has not yet had time to affect many data for the real economy.
Of course, it would be premature to call the top of the global recovery in growth terms, let alone the level of gross domestic product. This is particularly true in the US. Even the relative doves on the US central bank’s Federal Open Market Committee have agreed that the economy is set for more expansion, not least because of the big tax cuts passed last year by Congress and Mr Trump. The Fed is clearly planning more rate rises this year.
But the scattering of bad news should remind policymakers that the world economy remains in uncharted territory. Wage and price inflation have manifestly failed to respond as normal to years of sustained growth. Expectations that economies are at or close to sustainable capacity and that prices are just about to take off have repeatedly been confounded. Even in the US, wage growth remains weak.
Perhaps the most dangerous idea in modern policymaking is that of normalisation: the belief that the world economy went through a time-limited period of extraordinary weakness following the global financial crisis, but that it will necessarily return to the status quo.
The reality is that the growth in sustainable output may have slowed indefinitely since before the crisis across many of the advanced economies. And even so, given that the monetary policy pedal is still pressed close to the floor in some economies, particularly Japan, it is far from clear that policymakers can sustainably maintain domestic demand expansion sufficiently to fill the output gap.
In fact, if the past were a good guide to the future, the world should be bracing for a downturn, given how long the recovery has continued. If that does happen, there is not a great deal of monetary ammunition left to combat it. Most of the big central banks, if not fiscal authorities, have got their stance broadly right since the recovery began from the financial crisis, erring on the side of monetary laxity. That approach has served the global economy well. The recent signs of weakness across multiple large economies confirm it should not be abandoned now.
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